Economic Logic, Too

About Me

I discuss recent research in Economics and various events from an economic perspective, as the name of the blog indicates. I plan on adding posts approximately every workday, with some exceptions, for example when I travel.

Monday, May 31, 2010

Everybody who has ever worked in an academic environment has complained about academic deadwood: tenured professors who do not contribute to research and often do not contribute much to anything else as well. The tenure system is often blamed, as it makes it very difficult to fire someone for underperforming. But even if there is an incentive structure, like merit increases in pay, they clearly have less bite for old faculty who will benefit from them for a shorter time.

I have always been on the lookout for a solution to this academic deadwood problem, thus when I stumbled upon this paper by Yu-Fu Chen and Gylfi Zoega, I was very hopeful. They draw a life-cycle model with unobservable research effort, while administration and teaching are observable. The paper comes to the conclusion that only the senior professors who enjoy research will do any, and thus heterogeneity in research keeps increasing with age. Nothing new here. Where a model becomes really useful is with policy prescriptions: how could the incentive structure be changed? Is is better not to have a tenure system? But none of that. How disappointing.

Here is my take at it, but without the benefit of having worked out a structural model. 1) Tenure needs to be weakened. While it was instituted to preserve academic freedom when research could not be evaluated, we have now plenty of metrics fro research performance. Doing poorly on those should be punishable. 2) Merit raises for good performance need to increase with age to counter the fact that older faculty benefit from them for a shorter time. 3) There needs to be much more flexibility and heterogeneity in teaching loads for senior faculty, so as to balance total effort.

Friday, May 28, 2010

The recent financial crisis saw bank runs of a new kind. Instead of depositors running banks, banks were running each other. I do not think anybody had foreseen that such a thing could happen, and there was little theory to help policy. Now we have at least two.

One is by Harald Uhlig. The second is by Antoine Martin, David Skeie and Ernst-Ludwig von Thadden. In both cases, it is about maturity mismatches, a core issue in bank runs: banks invest in longer maturities than their liabilities. In this case, banks hold assets as guarantees, but they have difficulties selling them quickly when in need of liquidity. Of course, if this happens at more than one bank, this has also an impact on asset prices, thus making it even more difficult to raise the required liquidity. The first paper emphasizes that risk aversion is crucial here to explain the discounts on the assets. The second paper highlights how cash-in-the-market pricing can precipitate a run. In both cases, it makes sense for a governmental authority to buy those assets at prices above market, and in both cases the government should be able to make a profit from this operation. Let's whether this will be the case in reality.

Thursday, May 27, 2010

With the enormous quantity of research being published nowadays, it is easy to feel overwhelmed by all this information. While Paul Samuelson could claim in the 1940s to have read all research there was, that statement is now impossible, even in a subfield. Clearly, there needs to be some way to filter this output, a role that traditionally journals have had. But, as I mentioned before, journals are not particularly useful, especially in Economics, because of huge publication delays and the fact that most are gated. Working papers are the way to go, but they are not peer reviewed, and there needs to be some sort of a filter.

I mention this because Omar Al-Ubaydli and Rufus Pollock address the filtering issue and argue that there should be an open and decentralized mechanism for doing so, with the help of digital technology. They argue that given that publishing nowadays is so cheap, there is no reason really to have gated journals, they should be open access, and there is no reason that journals should have exclusivity on articles. In cannot agree more. A paper may be of interest to several audiences, why would only one benefit from it? And why would you want to hide it behind a costly gate? And let commercial publishers exploit their market power?

But why go to open access journals? Why not bypass journals entirely and let the peer review process be handled by citations and discussions on blogs like this one or the others listed at EconAcademics? This process is certainly open and decentralized, and don't we believe that the market mechanism can lead to efficient allocations without central intervention? For one, I do not see where the market failure would be. And we have the institutions in place to handle the necessary monitoring, with NEP and the RePEc rankings.

Wednesday, May 26, 2010

In terms of politics, one of the big fears that the Internet brings is the potential for radicalization of supporters at the extremes of the political spectrum. Indeed, the Internet allows them to find each other, confirm each other's radical views and in particular dream up conspiracy theories without being challenged by reality. And that is where it becomes dangerous. Think of the various terrorist movements in the 1970s in Europe, where members lived in something like reclusive communes. The Internet allows these communes to be virtual and thus recruit more members. Should we be worried?

Matthew Gentzkow and Jesse Shapiro say that the contrary is actually the case. They look at the segregation on news consumption and find that it is low for Internet news. It is higher than for offline news, as I would have suspected, but much lower than for face-to-face interaction. And it should thus be encouraging that people are moving more and more from face-to-face interactions to online interactions. I am thus reassured.

Tuesday, May 25, 2010

"One man one vote" is not always optimal. I reported a few days ago that technocrats can under some conditions take better decisions than a referendum could. The point there was about information and heterogeneity of preferences.

Surajeet Chakravarty and Todd Kaplan use similar arguments to compare simple voting and shouting matches. In the latter, those caring more about the outcome put more effort into shouting. Thus, if there is a lot of variance in opinions, shouting better reflects marginal utility and yields something closer the social optimum.

How is this shouting concretely expressed? It should be a signal that is costly and in some way wasteful. In France, it is demonstrating on the streets. In the United States it is donating to political campaigns. In Thailand it is erecting barricades. Usually seen as major inefficiencies, all these can actually be good.

Monday, May 24, 2010

One nightmare of parents of a girl is that she would get drunk and get into "unanticipated" sexual acts. If you told your daughter not to drunk with this in mind, be advised that her drinking is not really an issue here. And this advice come from an economist.

Glen Waddell uses the National Longitudinal Study of Adolescent Health and finds that sexual activity does not depend on one's own drinking. And, interestingly, female sexual activity depends (positively) on the male's drinking, but not the reverse. In other words, tell your daughter to get involved with boys who do not drink, but she can drink.

Friday, May 21, 2010

There is an endless literature that studies whether the minimum wage has positive or negative employment effects, spurred in particular by the much discussed Card and Krueger result that the relationship is positive. Most subsequent papers argues for the contrary, both empirically and theoretically.

Fabian Slonimczyk and Peter Skott appear to revive the debate with a theoretical contribution using a model where workers have an incentive to shirk on the job. Suppose there are two types of workers, skilled and unskilled, and two types of jobs, good and bad. When monitoring is imperfect and workers cannot pre-commit not to shirk, firms will threaten dismissal for bad effort, and need to keep wages high. This induces rationing of jobs, and thus some skilled workers end up in bad jobs, and some unskilled workers end up unemployed. This mismatch is particularly bad because there is over-education. Now introduce or increase a minimum wage. As long as it bites and firms prefer low-skill workers in low-tech jobs, it relaxes the no-shirking condition for low-skill workers, and thus increases their employment and wage, with little consequences for high-skill workers. If, however, firms prefer high-skill workers in low-tech jobs, there is an increase in high-skill employment and a decrease in low-skill employment. The key here is that heterogeneous skills create monopsonies and job-skill mismatches.

Slonimczyk and Skott then try to back their results up with some empirics. But the short samples do not lead me to have much confidence in those. It would be interesting to see someone test this theory with better data.

Thursday, May 20, 2010

Why do people volunteer, or why are they altruistic? I have followed the open source movement, and beyond the sense of doing this for the common good, there certainly is an element of showing off skills, be it just for brownie points or for signaling to potential employers. But such signals are not relevant in other areas of volunteering.

Take volunteer firefighters, who Jeffrey Carpenter and Caitlin Knowles Myers study. They have data on time spent volunteering, altruism measures from the standard dictator game as well as other behavorial measures and conclude that both altruism and social image matter. And the more people get compensation by money, the less the social images matters.

These results are hardly surprising. Volunteer firefighters quite obviously like their work and their utensils. Just see how shiny they keep their trucks and take every opportunity to parade them. But that is good, and this is a way to show to others how altruistic they are, similarly to Shriners in their miniature cars. And once paid, firefighters seem to consider their job like any other, so image is less important to them.

That said, firefighters enjoy quite some social prestige, which is repeatedly reinforced by authorities and media. This applies also to the police force and teachers. I have always wondered whether this was a way to compensate them for low pay. From this study, it seems firefighters are certainly internalizing this trade-off.

Wednesday, May 19, 2010

Competition is best, economists often claim. Except when it is not, for example in the case of natural monopolies, where the duplication of infrastructure is wasteful. THe case can also be made that competition is not as good as one would think in the insurance industry

Giuseppe de Feo and Jean Hindriks explain that adverse selection has worse consequences under competition. Indeed, in a monopoly, the insurance company can make profits on some products which allows to cross-subsidize others. With competition. profits are driven to a minimum, and cross-subsidization is minimal. This is important because cross-subsidies allows to relax the incentive constraint. This provides better coverage for high risks, but lowers participation among low risks.

One aspect that was not mentioned in the paper is that monopolistic insurers, because they have a larger market share, are better able to diversify the individual risk of the insureds. Observationally, this makes them closer to risk-neutral, and thus allows them to offer lower premiums, every else being equal. Of course, they could use their monopoly power to raise premiums, but with smart regulation or threats to entry, this can be prevented and the full social benefit can be obtained.

Tuesday, May 18, 2010

There used to be a time, not long ago, where tax rebates were popular. The idea was that putting money in people's pockets would drive them to spend it all and by multiplier magic the economy would grow sufficiently to recoup the lost taxes. And it did not work, as the Ricardian Equivalence would state, people mostly saved it all up for the looming tax increases. The only real impact came from those households where the Ricardian Equivalence would not hold, the cash constrained ones.

Thomas Bishop and Cheolbeom Park argue that the latter are a dying breed, and this is why the 2001 tax rebates in the US failed even more than the previous ones. The reason is that the increased availability of credit card lines reduced the number of households that were borrowing constraint, and those holding credit card debt simply applied their tax rebate against the current debt. The only ones who would spend the tax rebate are those who maxed out their credit card and still want to spend more.

All of this is rather obvious, and we all know these theoretical results since the works of Mark Huggett, Rao Aiyagari and Christopher Carroll. But it bears repeating, because people, and especially politicians, keep ignoring this.

Monday, May 17, 2010

It is well known that in Spain and especially Italy, people in their twenties and even thirties stay with their parents until they find a job, and they often wait for the "perfect" job. This looks like an unemployment insurance with infinite duration with substantial moral hazard, which has lead to sky high youth unemployment rates in Europe.

Greg Kaplan is documenting that something similar is happening in the United States. Using the NSLY, he finds that many of those who do not attend college return home during unemployment spells, much like college students return home over the Summer. This analysis is very nicely done with an estimated structural model that features a repeated game between children and altruistic parents. In particular, this allows to understand why the savings rate of young people is so low. As they have the option of returning to their parents, they see no need to build up any precautionary savings. This means also that programs like unemployment insurance have little impact for them.

Friday, May 14, 2010

A policy decision needs to be taken. Do you let technocrats conduct a cost-benefit analysis or do you let people vote on it? Our first intuition would tell us that a referendum is best when people's opinions are widely dispersed, and a cost-benefit analysis is best when not.

All wrong, claim Martin Osborne and Matthew Turner. The reason is that referenda only reveal ordinal information about preferences, whereas cost-benefit analysis also reveals cardinal information: If a majority is only slightly bothered by a policy, but a minority sees huge benefits, social welfare would indicate such a policy should be implemented. A referendum would not allow it, whereas a cost-benefit analysis would. But referenda have the advantage to attract well-informed voters, as uninformed ones typically abstain. A cost-benefit analysis would also sample uninformed ones, which is bad.

Thus: use referenda when there is poor information and there is little dispersion in preferences, whereas use cost-benefit analyses when there is good information and large dispersion in preferences.

Thursday, May 13, 2010

How do you measure guilt? There is no market price for it, and most of the time it has no measurable expression. One would need some rather particular circumstances to find a way to measure guilt. Hongbin Li, Mark Rosenzweig and Junsen Zhang found it.

During the Cultural Revolution in China, many urban families had to send some of their children to work among farmers. Assignments were to a large extend random, and parents had to choose which child to send. As this send-off was viewed as an unjustified punishment, many parents felt guilt and tried to compensate later in life with transfers, as a marriage gift or other. To get a clean data set, Li, Rosenzweig and Zhang set out to recruit twins and compare those who were separated during this period, as presumably everything else prior should have been identical. And it turns out that those that were sent off received substantially more from their parents, even when they were subsequently better off than their siblings. And this result is robust to all sorts of controls, for example party membership (there was indoctrination on farms, and party members were more likely to gain favors in the system, which parents may want to buy into).

I hope they will be using this data set for other studies. Otherwise, this would have been a tremendous effort for only a proof of concept. Because I see little use for the result beyond that.

Wednesday, May 12, 2010

It is a recognized problem that demographic change is bringing significant problems to pensions systems. People live longer and thus spend a larger share of their life on a pension, which costs a lot (see Greece for a spectacular example). And fewer births per capita imply that fewer working people can support the pensioners. The solutions are thus: lower benefits, increase contributions, raise retirement age, encourage fertility (and increase mortality, but that is politically not feasible).

Alessandro Cigno suggests a clever way to improve the situation that is equivalent to a combination of the above policy changes: make part of the pension benefits contingent upon having children. Clearly, this should increase fertility. However, this is a step back to the time where one would rely on one's own children for old age. Also, I am not sure the fertility incentive is ell timed. Young households are discounting heavily retirement when they make fertility choices, and contemporaneous incentives should have much more bite than some that kick in only decades later.

Tuesday, May 11, 2010

We all know that tax are usually bad because they distort, and this distortion goes the wrong way for most taxes. But we need them because the government needs some revenue, and some redistribution is fair. In the current context of high fiscal deficits, it would come in real handy if there were a way to overcome these distortions so that economic activity not be hampered by the inevitable increases in taxes. Proposals usually come from luminaries with dubious credentials, but when three established economists come to the rescue, you listen.

OK, I may be overdoing it, but Marco Del Negro, Fabrizio Perri and Fabiano Schivardi have an interesting proposal. The idea is to allow people to buy out future income taxes with a lump-sum payment. This is revenue neutral and removes the distortion, thus increasing the labor supply and then consumption and income. Things are not as simple as they seem. Indeed, the government does not know your ability to generate income ins the future. But it may elicit you to tell the truth by sharing some of the surplus created by the removal of the distortion. Concretely, the government offers a menu of contracts, which all contain a buyout price and a tax reduction, and people self-select optimally by potential income category.

As an example, they propose a $4500 buyout that reduces taxes by 5%. 10% of the population would buy this contract, which seems trivial yet increases GDP by 1%, because it is mostly the high income people ho take advantage of it. And this is Pareto improving. It is easy to see why: I can offer the government the same tax payment I would pay if I were under a proportional or progressive income tax against the ability to work as much as I want without tax consequences. Of course my labor supply will increase, I will earn more, spend more and other will have more income as a consequence and pay more taxes. Everybody wins. Where do I sign up?

Monday, May 10, 2010

What makes a blog successful? Well, first define success. It can be the number of people reading it, the number of comments on it, or the revenue from advertisements. I do not have benchmarks to compare mine, but I am quite sure my blog does poorly on at least on three of these definitions. Thus, what am I doing wrong?

Alexia Gaudeul and Chiara Peroni may have the answer. They use LiveJournal to study how bloggers, write, comment and interact. The keys to success seems to be for the blogger to comment on other blogs, thus eliciting reciprocal comments. The blogger also needs to reply to comments on his own blog. This sounds like bloggers are only among themselves and form cliques and the one with the most friends wins. Just like in high school. But I think this is all coming from the dataset, which does not record lurkers and other outsiders.

Quite obviously, I am doing everything wrong. I hardly comment on other blogs. I do not continuously follow comments, as I only check them when it is time for another post and rarely follow up. I'll make an effort.

Friday, May 7, 2010

What is the difference between macroeconomics and international macroeconomics or trade? There is a border. Just splitting an economy in two seems trivial, yet it matters. A lot. There is plenty of empirical evidence that borders matter. They inhibit trade. They allow for purchasing-power-parity deviations to persist. The economic well-being can differ dramatically across a border despite geographic similarities.

Emmanuelle Lavallée and Vincent Vicard note that the number of borders has considerably increased since World War II, with the number of countries going from 72 to 192. Given the border effect, this should be bad. But this has also a important side effect: transactions that were internal become international, thus boosting international trade statistics. Lavallée and Vicard find that measured international trade has increased by 9% solely because of new borders, but actual trade would have been 4% higher without those borders. While this is not negligible, we need to keep in mind that world trade has increased by a factor of 30 during this period.

Thursday, May 6, 2010

One would think that the timing of death is largely exogenous. Think again, and it is not suicide or murder I am talking about. Estate taxation has probably the most volatile tax regulation among all taxes, as it can change dramatically from one year to the next. And these dramatic changes can encourage people to time their deaths.

Marcus Eliason and Henry Ohlsson look at Swedish data and notice that for deaths around the date of a taxation change, there is a notable asymmetry in the reported number of daily deaths, especially for those subject to estate taxation. Of course, it is unlikely that the true time of death was influenced, it is more likely some fudging on death reports happened. I usupect the same happens in other circumstances, like few people are officially born on July 4 in Iran, or May 1 in conservative circles in Europe.

Wednesday, May 5, 2010

According to theory, precautionary savings are accumulated to smooth consumption against income shocks. Households largely conform to this theory, which is best seen by considering that the marginal propensity to consume is quite lower than one. Universities, at least American ones, have endowments that could be used for the same purpose and often have. But the story is quite different when it is the endowment that gets a negative hit, instead of income.

Jeffrey Brown, Stephen G. Dimmock, Jun-Koo Kang and Scott Weisbenner find that universities usually reduce their operational expenses in situations like the current crisis. And according to theory, this makes perfect sense, as their permanent income has dropped. What is interesting is that different type of universities react differently. Support staff always get reduced, but not administrators. Sigh. In top universities, cut-backs are concentrated on student financial aid, in the other ones cuts fall mostly on tenured and tenure-track faculty, trying to substitute them with adjuncts. And, interestingly, when peers suffer heavier endowment losses, universities increase hiring, as it looks like they try to poach on the competition.

Tuesday, May 4, 2010

The mafia and similar organization are a tumor on an economy. They divert the effort of people to unproductive activities, they upset the rule of law and discourage entrepreneurship. But it is difficult to actually measure the impact of the mafia, because their is no measurement of its activities.

Nicola Coniglio, Giuseppe Celi and Cosimo Scagliusi use difference in the penetration of the mafia in various towns of Calabria, which they measured themselves, to tease out from the data that mafia presence decreases education and increases emigration. Intuitively this makes sense: why you want to get educated if it is not rewarded, i.e., educated people have more income and are more likely to be business owners and thus have to pay a protection fee to the mafia. The only way to avoid this is to emigrate.

More interesting than the obvious is the size of the effect. The historical presence of the mafia in a town decreases the proportion of high school graduates by two percentage points. This is not negligible, as only about a quarter of the population has such a degree.

Monday, May 3, 2010

Are business cycles driven by expectations? Standard business cycle theory would tell you every depends on current fundamentals, but as expectations build on those fundamentals, both should matter. Take a real business cycle model. If people expect a total factor productivity shock to be persistent, they will adjust consumption and investment accordingly. But waht are the relative contributions of current fundamentals and expectations?

Sylvain Leduc and Keith Sill use various surveys on economic expectations and find they matter. That should not surprise too much, if one looks at the 1990 and 2008 recessions in the United States. But expectations are very hard to quantify, plus surveys have significant measurement issues. Still, their VAR gives a clear message.

This makes me wonder how much a business cycle can be "manipulated" by media and authorities. Think about the last crisis, where government and media were claiming we were slipping into the Great Depression. That could only be self-fulfilling. Or how Bush Jr. told Americans to consume after 9/11 to prevent a recession. Or the Soviets showing eternal optimism about their economy. But the latter could not be credible in the long run.